August 24, 2020 - 7:28pm EST by
2020 2021
Price: 49.14 EPS 0 0
Shares Out. (in M): 4,347 P/E 0 0
Market Cap (in $M): 214,200 P/FCF 0 0
Net Debt (in $M): 12,530 EBIT 0 0
TEV ($): 226,730 TEV/EBIT 0 0

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If Intel (INTC) is not the most important strategic asset in the US right now it’s up there. Intel has lost its way with the wrong leadership and the wrong focus. The engineering roots were obviously placed on a lower pedestal to profits, which is a common mistake, but one that we think may have to be rectified for national security purposes which could also unlock significant value for the stock.

Quick Background:

While Intel has a handful of different, inter-related businesses, from a high level we can kind of think of Intel’s business as two parts: chip design and chip manufacturing (fabrication).

Typically in the fab business you invest billions building new manufacturing capacity for a new generation of chips, which requires large upfront investment that is rapidly depreciated and then provides substantial margin in the out years as the deprecation falls off.

In 2016, instead of investing in the next gen of fab capacity Intel decided to double down on 14nm fab capacity. This could be interpreted that mgmt thought the opportunity there was large, but also that the manufacturing team was potentially falling behind the design team. Since that point in time, it has continued to miss targets for the fab business on next gen chips.

This has been allowed to happen (and the stock hasn’t been punished too bad over this time frame being up ~50% since the beginning of 2016) because profitability has continued to expand due to the secular shift to the cloud and its dominant position in server chips:

“This is a company that has completely lost its way technologically for years now, but because of its dominant position in a category (server chips) driven by secular changes in computing (cloud shift in back-end services plus mobile-driven explosion in usage) it has yet to feel any sort of financial pain from that failure; this, sadly, has only led to further failures, and as I noted last month, serious national security vulnerabilities for the United States. This is abject management failure.”  -Ben Thompson, Stratechery

The Opportunity:

As chips move to 7nm, Intel’s fabrication business is at least 12-24 months behind internal targets, giving an edge to TSMC and Samsung. As it falls further behind the technology curve pressure is building to use external foundries for manufacturing (most likely TSMC and possibly Samsung). Here’s what CEO Bob Swan said on the earnings call:

“We’ve root-caused the issue and believe there are no fundamental roadblocks, but we have also invested in contingency plans to hedge against further schedule uncertainty…..We will continue to invest in our future process technology roadmap, but we will be pragmatic and objective in deploying the process technology that delivers the most predictability and performance for our customers, whether that be in our process, external foundry process or a combination of both.” (emphasis mine)

This sounds like a precursor to Intel possibly becoming a fabless chip designer. However, having Intel’s fab business endure a full demise presents a national security risk, ensuring most chips are manufactured abroad.

The momentum is already building, quickly, that something has to be done to ensure that the US has significant semiconductor fabrication capacity. Accepting that chips are fabricated in Taiwan, South Korea and Japan is simply no longer acceptable.

As a side note, let’s think about what mgmt is seeing over at AMD: Since 2016, AMD’s stock price is up ~2800% vs. ~50% for INTC. AMD had previously spun off its fab busines into GlobalFoundries and is now pure design, using GlobalFoundries, TSMC and Samsung to manufacture chips. AMD CTO has said he doesn’t regret going fabless as it has really allowed them to focus on chip design without worrying about manufacturing and the bottleneck it creates. I’m sure he doesn’t regret the nice increase in the value of his shares/options even more


Separation / spin-off of fab business or JVs between well capitalized tech companies and fab business

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